This paper analyzes the effect of rapid inflation on a country's international position. The paper highlights that when prices and costs in any country rise rapidly, goods produced in the country soon become more expensive than similar goods produced abroad. Unless the exchange rate changes, this encourages imports and discourages exports. As prices in a country rise more rapidly than in the rest of the world, individuals in that country tend to turn from buying these increasingly expensive products of their own industries to the relatively cheaper foreign goods.

Transactions

The first quarter of 1965 saw a sharp expansion in the amount of financial assistance made available by the Fund to the developing countries and a further drawing, of $75 million, made by the United States under its existing stand-by arrangement. By the end of March, drawings outstanding by all member countries had risen to a record total of more than $2.7 billion. Twelve countries used the Fund’s financial resources during the first quarter, drawing the equivalent of $279 million. In the same period, the Fund approved eight new stand-by arrangements for developing countries in Africa, Asia, the Far East, and Latin America, as well as a new arrangement for Turkey, for a total amount of nearly $450 million. Though repayments to the Fund during the quarter were also at a high level, new drawings exceeded repayments by $100 million.

The greater demands made on the Fund’s financial resources by the developing countries in the early months of 1965 followed a period of two years in which drawings by these countries had been relatively low. During 1963 and for much of 1964, the export earnings of the developing countries were expanding and their exchange reserves strengthening. Last year, drawings by these countries, at $180 million, were the lowest for five years, and for the first time since 1955 their annual repayments exceeded their new drawings. During the course of 1964, however, the rate of growth in the exports of the developing countries was weakening, while the level of their imports was tending to rise strongly.

The largest single stand-by arrangement approved by the Fund during the first quarter was that for India, for an amount of $200 million. It was designed to reinforce India’s reserve position, which had been deteriorating sharply, and thus provide a breathing spell in which the measures introduced by the Indian authorities to correct the balance of payments disequilibrium could take effect. Another large stand-by arrangement approved in the first quarter was a $125 million arrangement for Brazil. In this case, it was in support of a stabilization program aimed at bringing about a sharp reduction in the rate of inflation, achieving a better balance in external accounts, and promoting Brazil’s further economic development.

The first quarter also saw a further extension of the Fund’s activities in Africa, with the approval of the first stand-by arrangement for the Kingdom of Burundi, for an amount of $4 million. At the same time, the Fund and the Burundi authorities agreed on an initial par value for the Burundi franc. In Korea, also, the introduction of an extensive exchange reform was supported by a stand-by arrangement for an amount of $9.3 million. Other countries for which stand-by arrangements were approved during the first quarter were Chile ($36 million), Costa Rica ($10 million), Pakistan ($37.5 million), Somalia ($5.6 million), and Turkey ($21.5 million).

Drawings under the new stand-by arrangements for Brazil and India saw the first use of Mexican pesos and Australian pounds in Fund drawings. With these two currencies, the number of currencies drawn from the Fund in recent years was raised to 14. The main currencies drawn from the Fund in the early months of 1965, however, continued to be those of the European industrial members. By the end of March, the Fund’s holdings of the principal Western European currencies, excluding the pound sterling, had fallen to $1,122 million, or to 35 per cent of the total quotas of these countries. Moreover, holdings of some individual currencies had been particularly depleted, notably those of deutsche mark which, at $87.2 million, had fallen to 11 per cent of quota, and of Austrian schillings which had been reduced to less than 4 per cent of quota. Other European currencies of which the Fund’s holdings had been reduced to relatively low levels at the end of March included French francs and Netherlands guilders.

Although the United States and the United Kingdom have made substantial recent drawings, their convertible currencies have continued to play an occasional part in Fund transactions. In 1964, drawings of dollars by all members amounted to $281.9 million, and included $200 million drawn by the United Kingdom last December. Smaller drawings of dollars have continued to be made in 1965 and, as a result, the United States drawings on the Fund, though amounting to a total of $600 million, had been reduced to a net figure of about $300 million by the end of March. A drawing in pounds sterling, equivalent to $16 million, made by Pakistan in January, also contributed to a reduction in the level of the United Kingdom’s outstanding drawings.

Members’ Quota Increases

The Fund announced on April 1 that Governors representing more than the required four fifths of the voting power in the Fund had approved proposals for increasing members’ quotas. These proposals provide for an increase of 25 per cent in all members’ quotas, together with larger increases for 16 countries whose quotas are considered to be out of line as a result of their recent economic development. If all the proposed increases become effective, total quotas in the Fund will rise from the current level of about $16 billion to about $21 billion.

Quota increases in the Fund are normally payable 25 per cent in gold and the balance in the national currencies of the members concerned. Although upholding this principle, the Executive Directors decided on the adoption of policies and procedures to mitigate the impact which the additional gold payments to the Fund may have on the reserve positions of individual members, and on this occasion to mitigate also the impact on the gold stocks held by members whose currencies are widely used as reserves.

Now that the Board of Governors has approved the quota increase proposals, it remains for individual members to consent to the increase in the quota proposed for them. Members will have until September 25, 1965 to give their consent, unless this period is extended by the Fund’s Executive Directors. Before any increase can become effective, members having two thirds of the total votes must notify the Fund of their consent.

IMF Institute

Twenty-one participants, mainly from developing countries in Africa, Asia, the Far East and Latin America, began the first of a series of 20-week courses, conducted in English, at the IMF Institute in Washington, D.C. Courses in French will also be a regular feature of the Institute’s program. The courses are designed to provide training in financial analysis and in national and international monetary and financial policy to selected groups of persons in government or central bank employment.